Gross Domestic Product

Answer 1

You’ve been watching the financial news and you’ve heard that the U.S. reports its GDP has risen in the fourth quarter. You have some vague idea that this means something about the economy but aren’t quite sure what it is. So what is the GDP? GDP is an acronym that stands for Gross Domestic Product. It is a figure that represents the monetary value of all end-use goods and services produced within a country for a period of time. End-use is a term that means the final product – a company’s sales of car parts it manufactures to Ford wouldn’t be included, but the sale of the end product, the car, is part of the calculation. So when you hear that the GDP is up for the fourth quarter that simply means that more goods or services were produced in this period. It is generally used as a way to take the pulse of the overall economy as a whole. It is calculated using the following formula: GDP = C + I + G + (X-M) Where: C = Consumption Stuff we buy. These are sometimes reported as sub-categories: durable goods, non-durable goods, and services. I = Investment No, this isn’t your 401(k). It is the total of business investment, i.e. when IBM builds a new plant or the Apple store adds to its inventory. It also includes the purchase of new-construction homes by private households. G = Government spending Everything from the building of the interstate highways to the purchase of M1A2 Abrams tanks that the government spends. These figures do not include so-called transfer payments such as social security or veterans’ benefits. (X-M) = Total Exports less Total Imports (aka Net Exports) Self-explanatory. GDP is often used to measure a country’s economic health. When it is taken into context with the population of the country it is known as GDP per capita. GDP per capita is calculated as GDP / population, and is often used as an informal gauge of standard of living within a country.